Former senior managers of defunct hedge fund Beacon Hill Asset Management claimed in court papers filed recently that they did not intentionally overvalue the once high-flying hedge fund.

Rather, they claim, a series of bad bets led Beacon Hill into a steep nosedive resulting in a loss of over 50% of its investors’ capital, including a 40% loss in one month.

Hedge funds are lightly regulated investment vehicles for the wealthy and institutions.

Thirty-six former investors in June filed suit in U.S. District Court in Manhattan against Beacon Hill’s four senior managers alleging that they intentionally overvalued the $770 million fund’s portfolio in order to earn millions of dollars in performance fees.

The investors are seeking $110 million plus unspecified damages from the former president, John Barry; its former chief investment officer, Tom Daniels; the former senior portfolio manager, John Irwin; and the former CFO, Mark Miszkiewicz.

Investors also allege that while MBS trading powerhouse Bear Stearns assigned drastically lower prices to bonds in Beacon Hill’s portfolio, Beacon Hill’s managers used their own much higher valuations to garner millions of dollars in fees that they would not have been able to charge had they used Bear Stearns’s valuations.

But in a motion filed on September 17 to get the suit dismissed, the managers claim that they used their best judgment in a market for mortgage backed securities in which public pricing was not readily available.

The motion also argues that the difference Beacon Hill’s and Bear Stearns’s valuations was because Bear Stearns’s pricing always assumed worst-case scenarios, such as being forced to liquidate all at once.

However, the investors’ complaint alleged that Bear Stearns’s bond prices were so much lower – in several instances between 24% and 31% – than Beacon Hill’s that intentional misevaluation is the only possible explanation.

But the motion to dismiss the suit claims that the price differential was constant from month-to-month in 2001 and most of 2002, indicating that the difference in portfolio evaluation levels was an accepted fact to both Bear Stearns and Beacon Hill’s investors.

However, it is not clear that Beacon Hill’s investors were told that Bear Stearns’s valuations were significantly lower than Beacon Hill’s.

Overvaluing, or mismarking as it is known in the investment community, is the most serious charge that can be levied against a hedge fund manager. With respect to the claim’s acknowledgement of the difference between Bear Stearns’s marks and Beacon Hill’s by the defendant’s lawyers, the head attorney for the investors, Scott Berman of Brown Rudnick Berlack Israels, said, “When you can’t take a position that they are different, you stake out the territory that you can.” Mr. Berman said he would file a response to the motion to dismiss by November 9.

The lawyer for Beacon Hill Asset Management, Joel Miller of Miller & Wruebel, said, “The nature of the claim to dismiss is that you have to accept that your opponent’s arguments as true, but still make the case that they are so we weak as to be unsupportable.”

He said if U.S. District Court Judge Lewis Kaplan does not dismiss the case, the document discovery process should begin sometime later this year.